The world economy should expect a bumpy road ahead in 2011 because increasingly uneven growth and widening economic imbalances are making it difficult for the major economies to set priorities for coordinated action, a senior European economist said recently in Tokyo.
“Even though the crisis is over, we are still dealing with postcrisis consequences,” said Paola Subacchi, research director for international economics at Chatham House, the London-based think tank formally known as the Royal Institute of International Affairs.
“It is difficult to reconcile domestic goals with global goals” when there is an “increasing gap between what we think is good for rebalancing the world economy and what countries think is good for their domestic economies,” Subacchi said at a Keizai Koho Center seminar on Dec. 9.
Today, global growth is not only weaker than forecast a year ago, but taking clearly diverging paths in various regions, Subacchi said.
“Emerging economies are definitely growing strongly and are driving the world economy, and then we see the advanced economies weaker,” she said.
The optimism in Asia being driven by China’s robust growth, for example, “is a completely different world” from Europe, where “people feel that growth is not there,” she said.
In addition, imbalances are widening between countries with current account surpluses and those with deficits — a situation that will only get worse as the strong growth in emerging economies continues.
“This poses problems in terms of converging global growth,” she said. “We need to rebalance the world economies . . . but how can you rebalance the global economy when we have some divergence in terms of growth and therefore (government) priorities?”
“Cooperation at the international level was very much easier when all the economies were diving together, but now we have this different pace of growth, and it is more difficult to find a consensus,” Subacchi said.
This was evident in the G20 summit in Seoul in September, when the leaders declared that widening economic imbalances were “fueling the temptation to diverge from global solutions into uncoordinated actions” where countries pursue their own goals regardless of what the rest of the world wants to achieve, she said.
If the G20’s declaration holds true, “we can assume that there will be more uncertainty going forward,” she said.
What will be the main priorities of the major economies be in 2011? For many of them, reducing budget deficits and consolidating public debt have become their main missions — albeit with different levels of intensity, she said. But the timing has been terrible.
“The problem is that fiscal consolidation has to be done at a time of still very weak GDP growth,” she noted.
With China now serving as the main engine of global growth, Subacchi said it is interesting to see Beijing attempting to stoke domestic demand and reduce its dependency on exports.
But Europe is probably the most problematic region in the world at the moment. The European Union’s inability to coordinate policy has been present ever since the EU decided to adopt a regional monetary policy that leaves fiscal policy in the hands of each member, she said.
“When the European monetary union was created, the big problem was fiscal policy: How can countries make sure that each of them comply with the good fiscal policy and there was no temptation to run fiscal policy that was too relaxed and generous,” Subacchi said.
“We know the story — some countries actually overspent, while other countries found themselves in a situation where interest rates decided in Frankfurt by the European Central Bank were not appropriate for the business cycle these economies were in . . . they had too low interest rates that fueled excessive credit growth, which in turn fueled the bubble in the property market. . . . Then there was the financial crisis and the need to rescue some of banks, and these countries ended up with larger amounts of debt and a large deficit.
“We still don’t have a magic recipe to sort out this situation — there have been some measures, including the creation of a rescue fund, but we haven’t been at the end of this problem,” she said.
Subacchi described Europe as a microcosm “where all the global problems are reflected” inside the region — including uneven growth and widening imbalances. The region has current account surplus countries like Germany, which is driving European growth, and deficit-generating countries like Greece that some say should no longer be in the unified currency club, she said.
“At the moment we have too many conflicting goals to come out with a clear objective — a clear priority — and therefore a clear measure to sort out the situation.
“Until we are able in Europe to come out with a solution to the sovereign debt crisis, I think the uncertainties will continue, and again we do not see a clear signal that we will soon be at the end of the tunnel,” she said. “There will obviously be more volatility and problems, and this will actually spill over into the real economy . . . and that will have an impact on the world economy as well.”